Question

The management of Iroquois National Bank is considering an investment in automatic teller machines. The machines would cost $131,100 and have a useful life of seven years. The bank’s controller has estimated that the automatic teller machines will save the bank $28,500 after taxes during each year of their life (including the depreciation tax shield). The machines will have no salvage value.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

1.	Compute the payback period for the proposed investment. (Round your answer to 1 decimal place.)
	Payback Period Years

2.	Compute the net present value of the proposed investment assuming an after-tax hurdle rate of: (a) 10 percent, (b) 12 percent, and (c) 14 percent. (Negative amounts should be indicated by a minus sign. Round your final answers to the nearest dollar amount.)

	Net Present Value (a) 10 percent (b) 12 percent (c) 14 percent

Answer 1

1) Payback period =131100/28500 =4.6 years

2) NPV

a) =PV(10%,7,-28500)-131100 =7649.94

b)=PV(12%,7,-28500)-131100 =-1032.94

c)=PV(14%,7,-28500)-131100 =-8883.31